Can the EU save the Iran nuclear deal?

Following the US withdrawal from the Iran nuclear deal, the EU, alongside Russia and China, has declared that it is "committed" to saving the agreement.

However, the EU has little room for manoeuvre. It is unlikely to impose the so-called blocking regulation, and national export credit agencies will face difficulties in stepping up export credit lines.

EU companies will have to make a difficult choice between operating in the US or in Iran. Most will probably adopt a cautious approach, prioritising trade with the US.

Tensions between the US and the EU have reached a new high and do not look set to abate in the coming months.

On May 8th Donald Trump, the US president, announced that the US would pull out of the Joint Comprehensive Plan of Action (JCPOA, the nuclear deal that the permanent members of the UN Security Council—China, France, Russia, the UK and the US—as well as the EU and Germany signed with Iran in 2015). Mr Trump's decision to withdraw from the deal means that the US will re-impose sanctions against Iran within three to six months. As a result, EU companies will face difficulties doing business with Iran. This is because US sanctions against Iran have a secondary, extra-territorial component: any company, wherever it is located, must comply with US sanctions if it uses US dollars for its transactions with Iran, has a subsidiary in the US or is controlled by US citizens.

The EU, led by France, was quick to declare its commitment to maintaining the JCPOA, alongside Russia and China. This means that the EU will not re-impose sanctions against Iran. The EU will also—in theory—try to help European companies operating in Iran to maintain their business operations there. However, despite a pick-up in business between Europe and Iran in 2016, Iran's share in EU trade remains negligible, at around 0.5% for both exports and imports. According to Eurostat, EU exports to Iran totalled €10.8bn in 2017 (up from €6.4bn in 2015, before sanctions started to be lifted). Imports from Iran to the bloc amounted to €10.1bn (up from €1.3bn in 2015).

Blocking regulation not a viable option

The EU could use blocking regulation 2271/96 to protect EU companies operating in Iran from US sanctions. This regulation was designed in 1996 as a countermeasure to US sanctions against Cuba, which the EU argued at the time were imposed at the expense of "European sovereignty". The blocking regulation makes it illegal for EU companies to comply with US extraterritorial sanctions—if a European company is complying with such sanctions, EU member states may take the company to court.

However, it appears unlikely that the EU will be able to implement the blocking regulation against US sanctions on Iran, for the following reasons.

First, imposing the blocking regulation would require a consensus among EU countries. This is by no means impossible, but it will be hard to achieve quickly.

Second, several EU countries—including France, the most vocal proponent of the implementation of this measure—have failed to implement enforcement legislation for the blocking regulation over the past 22 years.

Third, the Iran sanctions regime is much more comprehensive than the Cuba sanctions regime, so the imposition of the blocking regulation would be extremely complex.

Fourth, Western banks have proved "over-compliant" with US sanctions in recent years. They often refuse to clear operations involving Iran even if those are not subject to sanctions. This means that EU companies found it very difficult to conduct business with Iran even before the US pulled out of the nuclear deal. Now that the US has left the JCPOA, it is unlikely that banks will become more enthusiastic about clearing transactions involving Iran.

Fifth, Iran remains on the list of the Financial Action Task Force (FATF, an international institution aimed at combating money-laundering and the financing of terrorism). Iran does not comply with international regulation in these fields (AML/CFT). As a result, financial dealings with the country remain difficult and are subject to intense scrutiny by regulators.

Export credit lines and European Investment Bank to have limited impact

On May 15th Federica Mogherini, the EU's high representative for foreign affairs and security policy, held a meeting with her French, German, British and Iranian counterparts. Shortly after, she released a statement that resembled a wish list regarding business ties between the EU and Iran, including vague statements about maintaining and deepening economic relations with the country.

However, this wish list did include a provision that, at least on paper, could help EU companies to maintain their business ties with Iran: "The further provision of export credit and development of special purpose vehicles in financial banking, insurance and trade areas". Such an arrangement could include export credit lines granted by national export credit agencies or loans from the European Investment Bank (EIB). However, both of these options would cover only limited amounts, as Iran remains on the FATF watch list (as a result, national Treasuries cap the maximum amount of export credits granted for deals conducted with the country). In addition, such mitigating measures would only cover trade. They would not help Iran to attract much-needed Western investment to modernise its ageing oil infrastructure, paving the way for increased involvement of Russian and Chinese companies in the country.

EU companies to make difficult choices

It remains difficult to predict what EU companies will choose to do regarding their dealings with Iran. The decision to remain in Iran, or to drop all business dealings there so as not to jeopardise relationships with the US, will depend on the specific situation of each company. Two main cases may be considered: EU companies already operating in Iran, and EU companies that were contemplating entering the Iranian market.

It is possible that EU companies that are already operating in Iran will choose to stay there, provided they do not use US dollars or have subsidiaries in the US. In such a case, EU companies that export goods to both Iran and the US could continue to do so (however, they could be subjected to sometimes not so subtle US pressure to leave Iran). EU companies that have not entered the Iranian market will probably choose to steer clear of Iran, especially if they have business dealings with the US. In the end, it will be up to each individual company to decide its strategy in a context of significant legal uncertainties. In whatever form it may come, government support will probably play only a minor role in private companies' decision making processes.

Tensions between US and EU keep rising

The current row over Iran is the latest of several serious disputes between the EU and the US regarding trade barriers, further increasing tensions between both sides. These have escalated in recent months, as the EU increasingly believes that the US uses sanctions as an economic tool to advance its business interests. In addition, EU member states are angry at what they see as being held hostage to US decisions regarding sanctions against Iran, which they view as an infringement on their sovereignty.

In the short term, the EU will try to keep the deal alive, but this will become more difficult over time. It will probably fail to reassure European companies regarding their prospects in Iran.